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Bair's Plan for the Banks

There are no mild directives in Bair's agenda for fixing the banks. She wants some tough changes and is trying to push these reforms through a non-profit group called the Systemic Risk Council, which is backed by the Pew Charitable Trusts. Here's a sampling:

Completely separate trading operations from the traditional deposit/lending departments. That way, regulators, taxpayers and deposit insurers like the FDIC wouldn't be on the hook for another derivatives fiasco. She stops short of advocating the return of Glass-Steagall, the New Deal law that broke up the banks and cleaved them from their speculative trading operations. But she would "wall off derivatives" from insured deposits.

Constrain leverage. When Lehman failed, its leverage ratio was 35 to one. Some European banks still have a 45-to-1 ratio. She'd like to see banks only being able to borrow $12 for every $1 of equity.

Eat Your Own Cooking. Bair would like to see banks hold onto the loans they make rather then sell them off to Wall Street for securitization. One of the reasons the subprimes caused such havoc is that they were bundled and rated highly as debt securities.

End CDS speculation. Credit default swaps, in Bair's view, "are like buying fire insurance on your neighbor's house. You have an incentive to burn down his house. That's a perverse incentive."

End the revolving door from Washington to Wall Street. Bair is opposed to any banking regulator getting a job working for a bank they used to be the watchdog over. She'd like a lifetime ban on this practice.

End TBTF. She supports the Dodd-Frank rules that would give regulators the power to break up banks through forced restructuring or bankruptcies. Despite the overall benefits to taxpayers and the global financial arena, megabanks are fighting this idea with all of their considerable resources.

Make bank balance sheets transparent. She backs tougher international standards like Basel III, which would, among other things, illuminate off-balance sheet risk.

Abolish the Office of the Comptroller of Currency. "The OCC has failed miserably in its mandate of ensuring the safety and soundness of the banks it regulates," she writes in Bull by the Horns. She'd move all banking supervision to either the FDIC or Federal Reserve.

Merge the SEC and CFTC. The securities and commodities futures trading commission have a tremendous amount of overlapping authority. A superagency would make much more sense and be more efficient in protecting investors. The new agency should have independent funding not subject to Congressional politics.

Abolish the mortgage enterprises. Fannie and Freddie, in Bair's plan, would be liquidated and the mortgage market would be handed back to the private sector. "We should let the private markets decide how much capital to allocate to mortgages."

And that's Bair's short list in addition to raising bank capital standards. While she's at it, she'd also revise the tax code to end subsidies for debt, speculation and breaks on investment income.

Note to Congress: There are some worthwhile ideas here, mostly because she calls attention to how the government is giving a huge kiss to Wall Street at the expense of the rest of the nation.

Alas, I doubt if President Obama would nominate Bair or the Senate would confirm her. There are still swarms of Wall Street lobbyists who will launch a fusillade of threats against newly elected senators, who will still need to raise tens of millions to get re-elected.

Citizens United -- which opened the doors to untold chicanery and veiled campaign bribery -- is still on the books as well. It should go long before Geithner goes, though. Then we could truly say that Americans have a chance to have a cop with integrity on the beat at Treasury.

Sheila Bair would not only be the new sheriff in town, she could help prevent a second round of what is the biggest swindle in human history. She's one of the few people in Washington who could take the bull by the horns.